Private placement involves investing money into a privately owned company. Investors may receive common shares, preferred shares, other forms of ownership interests, warrants, promissory notes (including convertible promissory notes), and bonds.
Private placement is a non-public offering of securities that, if qualified, do not need to be registered with the SEC. There are many different types of securities that can be sold in a private placement. Unlike a public offering, only a small number of private investors are allowed to buy the securities.
Private Placement Benefits
Private placement is advantageous because it is usually cheaper and less time-consuming than public offerings, while providing a source of income for a company. However, it may be difficult to find investors who fit the qualifications you are looking for.
Private Placement Challenges
Seeking investors involves preparing a private placement memorandum (PPM). A PPM should be prepared by an experienced private placements attorney because failure to include material information can result in serious legal liability to investors who lose money after they invest.
All investors must have sufficient financial knowledge and experience to be able to evaluate the risks and merits of the investment. Some private placements may only be offered to accredited investors: generally, those with a net worth in excess of $1 million or annual income exceeding $200,000.
Private Placement Alternatives
Other options are available for small startup businesses. For example, if a business qualifies for a 504 exemption (Rule 504 of Regulation D), a basic business plan and subscription agreement would be sufficient.
For example, critical initial legal agreements for a start-up seeking outside funding without a private placement would include
- all organizational/operational documents for the new legal entity (C-corp or LLC),
- a founder’s buy-sell agreement,
- a form of non-disclosure agreement to deliver to both individuals and companies interested in the product, and
- a form of employment agreement for employees and a form of independent contractor agreement that each contain provisions vital to a tech start-up (e.g. non-competition, non-disclosure and intellectual property covenants).
An attorney experienced in funding companies will provide counseling to founders on issues of raising capital and the demands of investors along the way, among a myriad of other services and business advice as circumstances warrant.
Overall, private placement may be a viable option to fund your business venture, but there are many factors to consider.